Harley-Davidson’s 25% Climb Is A Signal

Harley-Davidson’s (NYSE:HOG) stock jumped nearly 25% in the last 21 trading days, which significantly exceeded the S&P 500’s performance (up 4.5%). This move should not be ignored. For some, it might be an opportunity to book profits, but we view it as a signal that recovery is underway. This makes Harley-Davidson an attractive investment. Why do we feel so? Two reasons. First, analysis of past stock movement patterns suggest that a 25% move in a month is a low probability event that signals the likelihood of further upside in the coming months. Second, a quick look at multiples indicates that the company’s market valuation has bottomed out, and the stock should move up as the demand recovers.

Our AI engine analyzes past patterns in stock movements to predict near term behavior for a given level of movement in the recent period, and suggests nearly a 45% probability of Harley-Davidson moving up another 10% over the next 3  months. Compared to this, the chances of the stock dropping -10% are just 8.5% suggesting that it is highly likely that the stock’s momentum will continue. Our detailed dashboard highlights the chances of Harley-Davidson’ stock rising or falling and should help you understand near-term return probabilities for different levels of movements. In addition, while the trends in underlying financials aren’t something to cheer about, a recovery in valuation multiple indicates improving market confidence. Our dashboard Big Movers: Harley-Davidson Moved >25% In One Month – What Next? lays this out.

Harley-Davidson’s stock price increased >25% during the last one month. In comparison, the stock has decreased -26.9% between 2017 and 2019, and has decreased -33.5% between 2017 and now. Do fundamentals support this? It certainly looks so. Harley-Davidson’s revenue has decreased -5.1% from $5,647 Mil in 2017 to $5,362 Mil in 2019. For the last 12 months, this figure stood at $4,508 Mil, implying a decrease of -15.9% over 2019 numbers. In addition, its net margins have declined -14.5% from 9.2% in 2017 to 7.9% in 2019, and dropped to merely 1.72% for the last 12 months. So why should you believe that Harley-Davidson’s stock can sustain its recent momentum? Simply because the valuation appears to have bottomed out.

Most of the fall in stock price occurred in 2018 and since then, it has more or less sustained its level despite Covid-19 impacting the business. If we look at the trailing-twelve-month P/S (price to sales ratio), it dipped to 0.56 by the end of March. This level was last seen during the 2008 financial crisis, and so far, the recovery in P/S ratio has been somewhat faster. In fact, at the beginning of this year, Harley-Davidson’s trailing 12 month P/S ratio was 1.07. This figure has now increased 6.5% to 1.14. What does this mean? Even if the company sustains the current P/S multiple, the stock is likely to go up as the demand recovers. By mid next year, we expect Harley-Davidson to reach 90% of its pre-Covid revenue run rate.

Taking both perspectives together, we believe that there is still upside left for Harley-Davidson. Interested in a portfolio of stocks instead? Check out our high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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